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Let’s Talk About Risk: What are the Riskiest Investments?

High-risk often goes hand-in-hand with the potential of high reward. However, every investor should determine their risk appetite in order to make smart decisions about their financial future. As I’m sure you know, if you are a young professional in your twenties you likely have a much higher capacity for risk than an investor in their mid-fifties with a family to take care of.

But just because you may have a steady income and few responsibilities does not mean you need to throw all your money at the riskiest investments expecting similar returns. The best portfolios are diversified and balanced. So with that in mind, let’s explore various types of investments and their risk.

I find that I best absorb information visually, so here’s a simple graphic that helps to give you a general mental picture of the risk/reward trade-off of various types of investments:

Some general rules for this pyramid:

  1. Investments at the top of the pyramid tend to be non-liquid and speculative in nature.
  2. Investments at the top of the pyramid offer a greater potential reward through capital appreciation, but also have a greater potential for the loss of principal.
  3. Investments at the bottom of the pyramid tend to be liquid (easily converted to cash with little principal fluctuation) and offer a stable, but lower rate of return. While investment products at the bottom of the pyramid pose little risk of loss of principal, there is little or no potential for capital appreciation. Because of this, if the rate of return is less than the rate of inflation, there is a risk that purchasing power may be lost over time.
  4. Investments in the middle of the pyramid offer a combination of moderate risk and return.

[Source: Smartaboutmoney.org]

 

The riskiest asset classes that are commonly traded and accessible to the average investor are derivatives (Securities that trade off of an underlying asset or group of assets like stocks or bonds) like futures and options, and speculative stocks and bonds commonly known as penny stocks and junk bonds respectively. It runs the gamut from commonly less liquid assets (Although some are publicly traded securities, there may be no buyers if the market for it turns sour) to highly liquid ones like treasuries with low risk and fittingly lower returns. The most important thing to do is to research before you invest. If you’d spend an hour shopping around online for the best microwave for your buck, then you should devote a comparative amount of time of research for any investment you make.

 

Here’s a list from ZenInvestor that ranks asset classes more specifically in terms of risk:

  1. Cash stuffed under your mattress
  2. Money Market Fund – FDIC insured
  3. Savings Account – FDIC insured
  4. Certificate of Deposit
  5. U.S. Treasury Bills
  6. U.S. Treasury Bonds
  7. Corporate Bonds
  8. Foreign Bonds
  9. Large Cap Stocks
  10. Mid Cap Stocks
  11. Small Cap Stocks
  12. Foreign Stocks – Developed Markets
  13. Foreign Stocks – Emerging Markets
  14. Options
  15. Futures
  16. Penny Stocks
  17. Lottery Tickets

 

Investing is best described by some as risk management. As an investor, you must determine what level of risk is appropriate for you; whether the normal mix of stocks and bonds will give you the yields you desire at a lower risk, or if you want higher returns and are willing to stomach the higher risk those involve. You should also spread your portfolio across a wide range of asset classes in order to keep your risk of exposure to an appropriate minimum. Even blue-chip stocks can be risky. After all, they were named after blue chips in poker. At times, the markets can be akin to gambling, but like any good poker player as long as you effectively manage your risk, you can greatly improve your chances of success.

Another way for investors that don’t have the time to actively manage their portfolios or aren’t confident enough in their own abilities and would like to learn from more proven strategies is using WhoTrades Live. You can look through the various strategies and managers and see their trading history, copy the composition of their portfolio, and even Autofollow their trades. 

You are even able to Autofollow successful strategies like this one, Anchor, which has a 257% return over the past year, for no fee. Feel free to explore the platform and find a strategy that's right for you, or if you can't find one create your own and become your very own asset manager. 

From all of us at WhoTrades,

 

Happy Trading

 

 

 

 

 

1. No information on this post should be considered an offer to buy or sell a particular type of security.

2. This is not an offer or solicitation in any jurisdiction where we are not advertised to do business.

3. WhoTrades LLC is not responsible for any system downtime, performance, accuracy or other issues that may occur when using this product.

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